Coal Mine Canaries Keep Market Rally Alive

The stock market’s performance in September beat almost all expectations and October is off to a strong start with the S&P 500 showing a gain of 1.3% so far this month. Since 1950 the S&P 500 has been up 41 years and down 26 with an average return of 0.76%.

(Photo by Abid Katib/Getty Images)

October has generally been a good month for stocks since the start of this bull market as it has been higher five years and down just three. The best years were 2011 and 2015 when it was up 10.8% and 8.3% respectively. The worst year was 2012 when the S&P was down 2.0%.

The Spyder Trust (SPY) has had a good year as it is up 15.6% YTD but for most of the year Wall Street has been questioning whether the market’s rally could continue. This was apparent at the start of the year and many analysts (as discussed last week) are still expecting the S&P to close the year below where it is currently trading.

Many of the stock market warnings for the past four years of the bull market have fixated on how overvalued stocks are like Thursday’s Wall Street Journal “This Market’s Running on Hope, Not Profits”. Mr. Mackintosh says “Believers in the bull market have been making a one-word case for why this year’s rise in stocks is justified: earnings”.

He must be talking only about the fundamental analysts as P/E ratios and valuations play almost no role in technical analysis. In his view stock prices have risen faster than their earnings which has made them even more overvalued.

I also think this the earning’s season may be somewhat disappointing. In my Thursday’s Viper ETF Report I commented that “My outlook for the economy remains strong but I would not be surprised if this earning’s season does not match some of the lofty expectations”.

Tom Aspray – Viper Report

In last weeks (“Should Traders Take Some Bank Profits Now?”) I took a look at the charts of Citigroup ( C) and JP Morgan Chase (JPM) who were reporting earnings last Thursday. Based on the technical outlook of these banks and the risk/reward analysis of the overall market I felt that traders should take at least some profits.

Both stocks finished the week lower as Citigroup was hit the hardest as it was down 4.6% for the week but at one point was down 6%. There is daily chart support in the $68 area, line a, along with the 20 week EMA. The volume was heavy on Thursday as the OBV has dropped well below its WMA

The market bears came to the forefront again last summer as Jeffrey Gundlach advised to “sell everything and Paul Tudor Jones said “U.S. stocks should terrify Janet Yellen”. On Bloomberg Guggenheim Partner’s Scott Minerd said he expected a “significant correction” this summer or early fall.

I think that the number of articles warning about the stock market over the past few years are like the “canary in a coal mine”. The fact that they continue to express these bearish views I feel is a positive sign for the stock market. If most instead moved to the bullish camp it could be a warning like the death of the canary in the coal mine.

These analysts will be right sometime in the future and a sharp correction cannot be ruled out before the end of the year. Once the market does correct the bears should again come out in force which will add to the market’s wall of worry.

This was what happened in the fall of 2007 as economists thought there was only a 30% chance of a recession. The Fed rate cut in September helped calm some fears but the sharp drop from the July highs and credit tightening did make them nervous.

Still in early October as the market was peaking some analysts were looking for ” a good year overall, up 10 percent, or 12 percent including dividends”. This lack of bearishness coincided with warnings from the advance/decline lines about the health of the stock market.

Tom Aspray – Viper Report

The advance/decline lines are not depended on valuations or P/E ratios and they have been strongly positive since they made new all-time highs in the spring of 2016. In late November the weekly A/D line moved above the September high (line a) which again confirmed the market’s positive trend.

The S&P 500 A/D line made a new high again in the first week of the New Year, point 2. At the time many on Wall Street were turning more negative on the stock market but I was confident that it was just a pause in the market’s rally.

This was confirmed by the further new highs at the end of February, point 3. A few weeks later the SPY reached the weekly starc+ band and the market started to correct. The decline lasted six weeks and the A/D line dropped below its WMA for one week (point 4).

By early May the weekly A/D line was making another new high (point 5) which was bullish. There were also new highs in June and August before there was a brief pullback. The A/D line has made new highs for each of the past six weeks and is still well above its rising WMA.

The Dow Utilities led the market higher last week gaining 0.83% followed by a half point gain in the Dow Transports. They both did better than the 0.4% move in the Dow Industrials while the S&P 500 was only up 0.15%. The small cap Russell 2000 lost 0.5% for its first lower weekly close in five weeks. The NYSE A/D numbers were positive with 1794 stocks advancing and 1239 declining.

Tom Aspray – Viper Report

The NYSE Composite made another new high Friday at 13,352 which was just below the monthly pivot resistance at 12,388. The weekly starc+ band is at 12,474 which is about 1% higher. The 20 day EMA is at 12,234 with the monthly pivot at 12,028.

Both the weekly and daily A/D lines made new highs last week and are still well above their WMAs. The daily A/D line moved into the corrective mode in August as it dropped below its WMA. By the start of September the correction was over as the A/D line moved above the resistance at line a. It would now likely take several days of strongly negative A/D numbers to drop it below its WMA.

The PowerShares QQQ Trust (QQQ) was up just 0.4% as the big tech names were more of a help last week. Apple (AAPL) continues to grind higher but so far the rally from the lows has not been impressive. That could change with a good volume up day but on the other hand a sharply lower close would be consistent with a failing rally. They report earnings on November 2nd.

Tom Aspray – Viper Report

The bullish tone of the stock markets was even more apparent overseas as investors both the global equity funds in record amounts. Japan’s Nikkei overcame resistance that goes back to 1996. Since it was recommended to Viper ETF investors in early March the iShares Core MSCI EAFE ETF (IEFA) has been a favorite global ETF.

It has 63% in greater Europe and 36% in Asia with a yield of 2.43% and an expense ratio of 0.08%. . The chart still looks very strong though with last week’s gain of 1.7% it is getting close to the weekly starc+ band. The positive signals from the relative performance and OBV in March are still intact.

Tom Aspray – Viper Report

I use these two indicators to systematically analyze the weekly and daily charts for the Viper ETF Report. Each Monday the results are presented in a table like this one from last Monday. This type of disciplined analysis can be very helpful in spotting those ETFs that are starting to become new market leaders.

The Economy

There was not much data on the economy last week but the FOMC minutes reassured investors. The PPI and CPI came in as expected while the Retail Sales came in at 1.8% which was slightly below the consensus view. The mid-month reading on consumer sentiment at 101.1 was much stronger than the consensus estimate of 95.4 as it hit a thirteen year high.

There will be more data for the market to digest this week with the Empire State Manufacturing Survey Monday followed on Tuesday by Import and Export Prices, Industrial Production and the Housing Market Index.

On Wednesday we have Housing Starts and the Philadelphia Business Outlook Survey along with the Leading Indicators are out on Thursday. Existing Home Sales data comes on Friday.

What to do? For the past few weeks there have not been many good opportunities to add to the market tracking ETFs unless you were willing to use a quite wide stop that was 7-10% below the market. This can be frustrating for those who want to add to their long positions as many ETFs are too far above good support.

This is likely to change in the next few weeks as being patient and avoiding high risk buys or sells is one of the keys to successful investing or trading. I am not sure the individual investors got the message as in the latest AAII survey the bullish % jumped 4.2% to 39.8%. The bearish % dropped 5.9% to 26.9%. I am concerned they are buying just before a short term correction.

There were are some ETFs that generated new buy signals last week after lagging the market for the past few months. In my scan of the Global/Country ETFS that is sent out every other Sunday there were four new weekly buy signals.

As we start the earning’s season one has to keep a close eye on their stocks as the reaction to even good earnings can be brutal. In the Viper Hot Stock report we generally make 1-2 new recommendations each week and generally take profits before an earning’s report.

In my Viper ETF Report and the Viper Hot Stocks Report, I provide market analysis twice a week along with specific buy and sell advice. New subscribers receive five past trading lessons for just $34.95 each per month.